(Updated 16 September 2021)
While the threat of the physical impacts of climate change is now a confronting policy issue for many countries, it is also rapidly becoming a key ESG issue for many exposed international corporations as well. This has two dimensions.
There is increasing pressure from major investors for companies seeking capital to demonstrate their resilience if their operations were to be challenged by an extreme weather event. Many firms carry out regular risk-profiling exercises against their most likely threats, and generally over three timeframes: within 5 years; within 10 years; or beyond.
The second and growing concern is about how a business will respond across this decade as the world undergoes a capital-intensive transition to a low carbon operating environment. Some sectors are clearly exposed to the business risks that this economic transformation is already generating. But it is also emerging that all large businesses will eventually need to disclose the nature and extent of their reliance on carbon-intensive processes and supply chains, to both regulators and investors.
The second game changed in May this year when the International Energy Agency, whose members include the world’s largest fossil fuel energy suppliers, announced that it saw the phasing out of coal, oil and gas across the world by 2035 as imperative.
The IEA is the leading international entity providing projections of energy demand, and these are relied on by governments and business in their economic planning. None of these users of the data will be able to dismiss this controversial declaration. To the contrary, it will increase pressure on them to disclose how they see the proposed acceleration of the transition away from fossil fuels being managed within their own areas of control.
A leading concern for example, will be that the IEA position may create expensive stranded energy assets that will need to be written-off.
Hundreds of billions of dollars have been invested over the past 5-10 years in new coal, oil and gas extraction and distribution infrastructure across the world. Unfortunately, much has relied on a business case based on a 40-year operational lifetime for the major capital assets involved.
Now however, the operators of large energy generation and distribution networks are increasingly likely to face markets with consumers who will be demanding renewable energy far earlier than anticipated.
The global decarbonisation program will not be linear. Crunch points will be reached when lower revenues from the reduced demand fail to support critical maintenance programs or the renewal of depreciated assets. In addition, the massive international shipping industry that carries fossil fuels around the globe will face increasing financial pressure when demand for their cargo dwindles as consumers turn to locally sourced renewables.
Suggestions that the IEA declaration was an isolated position were answered when the G7 Ministers soon after issued their own declaration backing it. This could be perceived as adding further sovereign risk to future investment decisions supporting new fossil fuel ventures.
But the transition will certainly not be without controversy, some of which will be caused by the fact that the world’s coal producers are currently planning as many as 432 new mine projects with a total annual output capacity of 2.28 billion tonnes. Of this, 614 million t.p.a is under construction and 1,663 m.t.p.a is in planning. China, Australia, India and Russia account for more than three quarters of the new projects.
The topic will no doubt be debated when the Heads of Government of the countries that have signed the Paris Agreement reconvene in Glasgow in November 2021. They will be requested to determine a new position on global greenhouse gas emissions, with a very tight 2030 horizon in mind.